20 July 2010

Student Loan Default Rates High

[O]ne in every five government loans that entered repayment in 1995 has gone into default. The default rate is higher for loans made to students from two-year colleges, and higher still, reaching 40 percent, for those who attended for-profit institutions.

While for-profits educate less than 10 percent of students, those colleges' students received close to a quarter of Pell Grant and federal-student-loan dollars in 2008, according to the College Board. And they accounted for 44 percent of defaults among borrowers who entered repayment in 2007, according to the Institute for College Access and Success, a nonprofit organization that advocates making higher education more affordable. When the government can't collect on those loans, taxpayers pick up the tab.

For-profit colleges have long blamed the sector's higher-than-average default rates on the sociodemographics of their students. According to the Career College Association, 43 percent of students attending for-profits are members of minority groups, and almost half are the first in their families to attend college. More than three-quarters are employed. . . . Harris N. Miller, the association's president, stuck to that explanation. "Four-year public and nonprofit colleges and universities have more affluent populations," he said. "Four- and two-year career colleges have less affluent populations." . . . .

Only 10 percent of community-college students took out federal Stafford loans—the most common type of federal education loan—in the 2007-8 academic year, and most borrowed less than $10,000, according to the College Board.

At for-profit colleges, 88 percent of students took out Stafford loans, and nearly 20 percent of associate-degree recipients graduated with more than $30,000 in debt. Those borrowing rates reflect the higher cost of attending a for-profit college. In the 2009-10 academic year, the average for-profit institution charged $14,174 in tuition and fees, according to the College Board, and the average community college only $2,544. . . .

After falling steadily through the 1990s and reaching a low of 4.3 percent in 2003, the national two-year cohort-default rate began climbing in 2004. The rate for the 2008 cohort of borrowers was provisionally put at 7.2 percent, the highest since 1997.

At the end of the 2008 fiscal year, $39.1-billion worth of loans were in default, according to the Education Department. By the end of the 2009 fiscal year, that total had swelled to $50.8-billion, an increase of nearly 30 percent. As of the end of April, the government had recovered only $6.2-billion of that money. . . .

Two years into repayment, 11.9 percent of borrowers who attended for-profit colleges have defaulted on their federal loans, compared with 6.2 percent of those who attended public colleges and 4.1 percent who attended private colleges, according to provisional data that the Education Department released in February.

Three years out, for-profit colleges' default rate has nearly doubled, to 21.2 percent of borrowers . . . For-profits accounted for 16 percent of all the loans (other than consolidated loans) issued from 1995 to 2007, but 34 percent of the defaults. Thirty percent of loans made to students attending four-year for-profit colleges have defaulted within 15 years of entering repayment, more than twice the default rates at public and private nonprofit four-year colleges, which are 15.1 percent and 13.6 percent, respectively.

The differences are smaller at the two-year level, where 40 percent of loans made to students attending for-profits have gone into default within 15 years of entering repayment, compared with 31.3 percent of loans made to community-college students and 29.3 percent of those made to students who attended two-year nonprofit private college.

Does a policy of not preventing bankrupt individuals from discharging their student loan debts in bankruptcy really make sense?

It makes no difference to the loan providers, who receive 97%-100% of their investment back from the loan guarantee. The federal government is recovering 12% of the money owed on defaulted student loans.

In the case of student who receive four year degrees and gradate degrees from public and non-profit private colleges, the default rates are low, and the benefit received by the students is overwhemlingly great and lifelong.

But, for graduates of two year colleges, college drop outs, and graduates of for profit colleges, the life long educational benefit to the student that allegedly justifies disallowing the discharge of student loans in bankruptcy is doubtful.

These students are cheated twice. Once by pursuing a course of student that doesn't provide a benefit, and again, by having to pay for it no matter how dire that student's economic future grows.

Solutions

1. It Should Be Possible To Discharge In Bankruptcy Student Loans That Don't Add Value Ten Years Or More Years After The Repayment Period Ends.

Eligible student loans should include loans incurred in connection with a degree program where a student drops out without earning a degree; and loans incurred by students in connection with a pre-professional program for students who complete the program but despite attempting to earn professional certification in their field, fail to obtain it.

Students who demonstrate for ten years that they aren't able to pay their loans, even in the face of collection efforts, ought to be given a fresh start, just as other people who overextend themselves with debt may.

A for profit institutions of higher education should be required to pay, to the federal government guarantor, the average loss per loan that the federal government incurs on defaulted student loans from that institution to the extent that this exceeds the average loss per loan from public and non-profit private institution student loan defaults.

This policy would cost institutions with results comparable to those of public colleges and non-profit private colleges nothing. But, it would prevent for profit institutions that charge a great deal for their programs, while providing little value to students from reaping large profits from this enterprise.

These institutions could, of course, instead, (1) secure their own lenders for their students, without the federal guarantees, (2) convert to non-profit status, (3) employ a more selective admissions process to reduce failure rates, (4) improve their instruction and post-graduation career counseling to reduce failure rates, or (5) increase their tuition to cover the anticipated repayments.

There is nothing wrong with a for profit college, per se, but it shouldn't have a business model that depends on receiving greater subsidies from the federal government via student loan guarantees than other institutions.

3. Loan Sizes Could Be Capped For High Risk Programs.

Another option to address the problem would be to cap the size of loans for programs to the cost of a typical public or private non-profit program. Thus, if 95% of students in two year degree program at public or private non-profit programs pay tuition, room and board of $10,000 or less, the maximum guaranteed student loan for those programs would be $10,000. Other means would have to be found to finance the balance due in more expensive programs.

Anticipated Impact

These reforms, taken together, would dramatically transform the for profit sector in higher education, by removing the large share of institutions that are offering their students little benefit, and are profiting at the expense of the federal taxpayers by doing so.

A large share of for profit higher educational institutions would likely fold, but the few that are good apples would continue to be able to operate and would gain respect and reputability that the status quo of fly by night institutions has denied them.

The savings involved in recouping losses from for profit institutions with high default rates would more than pay for the modest revenue losses involved in allowing students who had themselves failed to get value out of their higher educations to discharge those loans in the decade that followed the completion of their education.